White space in terms of capital availability for the Real Estate Sector
In a nutshell
Banks are not meaningfully active to the real estate sector, while NBFCs have significantly vacated this space. There is a massive white space in terms of capital availability for performing, unlisted players. At the same time, the residential real estate sector is in the middle of a robust upcycle. This has led to a unique, attractive opportunity for creating a specialized credit platform to plug this funding gap.
Declining traditional sources of capital for the Real Estate Sector
RBI has recently shared a report on Trend and Progress of Banking in India (2022-23). Few points caught our attention related to the deployment by Scheduled Commercial Bank (SCB) and NBFC credit in Commercial Real Estate (CRE) and housing loans:
Traditional sources of finance to CRE are not meaningfully active
- Total CRE exposure of Banks and NBFCs has grown at a CAGR of just 4.4% from FY19 to 1HFY24 (refer figure 1)
- Share of CRE to total credit to industry and services has fallen from 5.1% in FY19 to 4.6% in 1HFY24
If we dig deeper, NBFCs have continued to shrink their CRE lending book:
- NBFCs’ CRE exposure reduced by 44% from INR 1.5 trn in FY19 to INR 0.8 trn in 1HFY24 (refer figure 2)
- NBFCs’ CRE exposure to NBFCs’ overall lending book reduced from 6.5% in FY19 to just 2.3% in 1HFY24 (refer figure 2)
- NBFCs’ share of credit to CRE (as %age of Bank and NBFC CRE) has reduced from 42% in FY19 to less than 20% in 1HFY24 (refer figure 3)
At the same time, residential estate remains robust with strong sales and launch momentum across cities in India (Refer our earlier insight on Higher mortgage rates have been absorbed well):
- 9MCY23 sales have already reached 91% of the CY22 sales
- Sales and launches in 9MCY23 have grown by 21% and 24% y-o-y respectively.
- 9MCY23 pan India inventory (in terms of years-to-sell or YTS) was 2.3, which is the lowest in last several years
- FY23 was the best year in terms of sales volume for all listed developers and it appears that FY24 would beat this record
Credit to retail housing loan from both Banks and NBFCs remains robust
- Overall housing loan (Banks and NBFC) has increased at a CAGR of 13.7% from FY19 to 1HFY24 (refer figure 4)
- NBFCs’ share of credit to housing loan (as a % of SCB and NBFC housing loan) has improved from 1.3% in FY19 to 1.9% in 1HFY24 (refer figure 4)
Certus view:
Clearly, SCBs aren’t too active in the CRE sector and NBFCs have significantly vacated this space. There is a massive white space in terms of capital availability for performing, unlisted players. On the other hand, residential cycle remains strong and we are in the 3rd year of a multi-year housing cycle. This unique situation has created an attractive opportunity for creation of a specialized CRE credit platform to plug this funding gap.
Note: SCB excludes the impact of the merger of HDFC Bank and HDFC Ltd